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In July this year Albert Edwards, the closely followed investment strategist at Societe Generale, warned that the S&P 500 was "on the verge of an ultimate death cross," foretelling imminent major losses for the stock market. The ultimate death cross occurs when the 50-month moving average (MA) of the S&P moves below the 200-month MA, or, put another way, when the difference between these moving averages – the spread – becomes less than zero.
In this article I reasoned that an ultimate death cross would not occur, and predicted that the spread would form a trough before the end of this year. The spread is now in the process of forming a trough, as one can see on figure 1. The lowest level of the spread will be 8, and this will occur the day after Thanksgiving, on November 23, 2012. From then onwards the level of the spread will increase at least until August next year, irrespective of the movement of the S&P 500.
A trough formation of this spread close to zero is a rare event, having occurred only on five previous occasions before. Moreover, this has historically always provided a positive outlook for the stock market, as can be seen from the table below.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost send email request to email@example.com.